The war on tax competition

The Wall Street Journal has an illuminating editorial about the international war against tax competition. High-tax nations (such as the United States) don’t like it when businesses shift operations to low-tax environments, and they mean to put a stop to it, using a grim transnational regime of programs designed to ensure everyone, everywhere is equally overtaxed:

After five years of failing to spur a robust economic recovery through spending and tax hikes, the world’s richest countries have hit upon a new idea that looks a lot like the old: International coordination to raise taxes on business.

The Organization for Economic Cooperation and Development on Friday presented its action plan to combat what it calls “base erosion and profit shifting,” or BEPS. This is bureaucratese for not paying as much tax as government wishes you did. The plan bemoans the danger of “double non-taxation,” whatever that is, and even raises the specter of “global tax chaos” if this bogeyman called BEPS isn’t tamed.

Don’t be fooled, because this is an attempt to limit corporate global tax competition and take more cash out of the private economy. In the U.S., the Obama Administration has made a five-year fetish of attacking successful American companies that dare to keep overseas profits overseas rather than pay America’s 35% corporate rate (plus state taxes). In the U.K., Starbucks, Google, and Amazon have been treated as scofflaws for not paying what politicians call their “fair share.”

The Journal also mentions Apple, Inc., whose executives were hauled before an embarrassing congressional show trial and harangued for daring to comply fully with the law, in a way that gave greedy politicians a smaller bite of their corporate profits than they wanted. This bizarre exercise in persecution for the non-crime of “tax avoidance” ended when Senator Rand Paul (R-KY) ran through the hearing chamber and delivered a Three Stooges-style slap-and-poke beatdown to his colleagues, at one point running a bandsaw through Senator Carl Levin’s (D-MI) scalp while Levin made baby-seal noises and threatened to “murderize” him in retaliation. (OK, you got me, Senator Paul just gave a speech, but it was a really good speech, and Paul’s exasperation had definitely reached Moe Howard levels.)

The Wall Street Journal says the primary weapon to be deployed in the early stages of the international War On Tax Competition will be the threat of “reputational risk” for companies singled out as BEPS offenders. In other words, politicians will target law-abiding companies for media assaults, extending the sphere of government power far beyond statutory limits. In the penumbra of Big Government power, people who have done nothing wrong will be compelled to obey the desires of the ruling class, no matter what the law actually says. Those Apple hearings in the U.S. Congress were a taste of things to come.

As with many of the false “crises” Big Government gins up to advance its agenda, there isn’t any sort of global corporate tax crisis. The Journal notes that American corporate tax payments are currently running slightly above their historical average, as a percentage of Gross Domestic Product, while in the United Kingdom, they are running slightly lower. The amount of money harvested from corporate taxes remains fairly constant, no matter how high tax rates are jacked up – the “bigger slice of a smaller pie” syndrome of tax collection is especially pronounced at the corporate level.

And as the Journal reminds us, corporations don’t really pay taxes, they collect them. The tax burden becomes a cost of doing business, passed down every stage of the production chain until it slithers into the pockets of consumers. The crusade against tax-avoiding businesses ultimately targets their customers, who are numbed up with class-warfare rhetoric before they are shoved onto the battlefield of economic liberty as cannon fodder.

In addition to remaining vigilant against international crusades against tax competition, we should look at the fate of American municipalities like Detroit. That troubled city collapsed as residents voted with their feet and escaped a high-tax, high-corruption, low-performance regime run by Democrats for five uninterrupted decades. The ruling party felt its grip on political power insulated it from the consequences of failure. They were wrong. Every city and state should learn the right lesson from Detroit, vigorously competing to attract residents and investors. The flight of capital and taxpayers should be the emergency alert system that government is going off the rails.

Of course, governments large and small would rather “solve” this problem by building fences to keep individuals and corporations trapped within their clutches. Detroit’s degenerate political regime wants to soak the other taxpayers of Michigan, and taxpayers across the United States, for bailout money. The national government tries to whip up public anger against corporations that legally avoid high U.S. tax rates, rather than competing to win them back to American soil.

The War on Tax Competition is yet another example of coercion substituted for persuasion. Competition is the single most powerful force for improving the integrity and efficiency of any organization – public or private, large or small. Retaining the voluntary commerce of an entire customer base is far more difficult than cobbling together an effective voting coalition to enforce ruling-class demands. No wonder bloated governments and their bankrupt political elites hate it.